G-7 vows to avoid manipulation of forex rates

The finance chiefs of the Group of Seven countries pledged Tuesday to avoid using monetary policy to control foreign-exchange rates, saying they should be determined by the markets — an implicit warning against Prime Minister Shinzo Abe’s monetary policies.

The statement was released prior to a meeting of the Group of 20 finance chiefs starting Friday in Moscow, as some major countries have criticized Abe’s government, formed Dec. 26, for intentionally pushing down the yen by forcing the Bank of Japan to take drastic monetary easing steps.

“We reaffirm that our fiscal and monetary policies have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments,” the G-7 members said.

The G-7 financial chiefs released a statement for the first time since last August. It is rare for them to issue a statement only mentioning foreign-exchange matters.

As emerging nations have also warned that their currencies have risen against a backdrop of monetary easing by developed countries, Tokyo is expected to again come under fire at the G-20 meeting, analysts said.

Finance Minister Taro Aso told reporters later Tuesday that the release of the statement was “meaningful” because the G-7 nations “understand” that Japan is not trying to manipulate foreign-exchange rates, and that the purpose of the government’s monetary easing is to conquer more than a decade of deflation.

“We have to decisively prevent (Japan’s economic and monetary policies) from making the world (economy) uncertain,” Aso added, voicing concern that if the yen keeps falling, it might negatively affect economic and financial conditions in other countries.

The G-7 members agreed that “excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” their statement said.

The yen has sharply weakened in the past few months. The dollar hit ¥94.46 — its highest level since May 2010 — in New York on Monday, up from around ¥80 in November, buoyed by Abe’s promise to press the BOJ to take “bold monetary easing” steps to achieve a 2 percent inflation target.

In a joint statement released with Abe’s government after the central bank’s two-day Policy Board meeting in January, the BOJ said it had decided to implement “open-ended” easing to attain the new inflation goal at the earliest possible time.

The ability of G-7 nations to criticize Japan for introducing monetary stimulus is weakened by their reliance on it, including the U.S., said Chris Turner, head of foreign-exchange strategy at ING Group NV. The dollar has fallen about 14 percent in trade-weighted terms since early 2009, as the Federal Reserve cut interest rates and bought assets.

“Today’s statement is primarily aimed at Japan and discourages Tokyo from talking the yen lower,” said Turner. “We very much doubt this G-7 agreement has any bearing on Tokyo’s domestic policy.”

U.S. Treasury Undersecretary Lael Brainard told reporters in Washington on Monday that the U.S. supported Japan’s attempt to “reinvigorate growth” while cautioning all countries against competitive devaluations.

Swiss National Bank President Thomas Jordan, who caps the Swiss franc against the euro, said he doesn’t see a currency war, as “central banks’ monetary policies are internal programs.”

Those remarks, made Tuesday, were more supportive of Tokyo’s approach than others made elsewhere in the past month. German Chancellor Angela Merkel and Canadian Finance Minister Jim Flaherty are among those who have raised questions about Abe’s monetary and fiscal strategy.